Is it just me or are we all a little disappointed in the Coalition at the moment.
Frankly, I'm shocked by the rubbish coming out of the Treasurer's office at the moment
1. The debt ceiling.Requesting a $500 million increase when $400 million would have been enough. Especially after badgering the government over their debt, to turn around and request an increase is a pretty bad look.
2. Secondly, the idea that the commonwealth should invest 10% in a losing industry like Airlines (through Qantas) is a very outdated idea that has no place in a modern government's policy. The industry is competitive enough and there are better things to spend $500 million on.
2. The rejection of the Graincorp deal. This is very much politics over the national interest. It is mentioned in Hockey's statement
"A further significant consideration was that this proposal has attracted a high level of concern from stakeholders and the broader community. I therefore judged that allowing it to proceed could risk undermining public support for the foreign investment regime and ongoing foreign investment more generally. "
If that isn't code for "We don't want to lose the Farmers support", I don't know what is!
As for the premise that 85% of exports from East Coast Farmers go through GrainCorp's logistical network, I say, big woop. There is the "WEST" coast Farmers as well, and the West Coast actually is the biggest exporter of their grains, not the East Coast, of which 66% of the harvest actually flows into domestic supply.
So just a red herring. It's a pretty sad result all up as the Grains industry would have got a $200 million capital injection from ADM straight away, which is badly needed for those East Coast markets that lag behind the more efficient West Coast industry.
Sad day when politics get in the way of foreign investment. A rookie mistake by Hockey.
Friday, November 29, 2013
Wednesday, November 27, 2013
Clean Energy Finance Company is optimistic!
Was reading with interest today regarding the Clean Energy Financial Companies claims that getting rid of it will cost the budget 200 million a year.
Seriously! First of all, according to the CEFC's own 2013 annual report, they made a grand total of $147,000 out of interest income from a single loan of $50,000,000. That is a yield of 0.2%! Go you good thing.
I presume they are talking about investments made after the reporting date. If you look at the annual report again, we have the following investments made after the reporting date.
87,000,000 (July)
353,000,000 (July)
Takes us to a grand total of $490,000,000. There must be another $46 million flying around then to take it to the amount mentioned by Broadbent and co of $536 million. This still leaves another $400 odd million in the kitty though (as in July Treasury paid a nice withdrawal of $811 million from the special account) which i presume is just sitting in Cash account at the moment earning nothing.
But we won't know the quality of these loans until the next annual report. But how can the board of this company say they can get a yield of 7% based on 4 months of investment???? This is purely the company board (and executives) trying to keep their directors fees/salary intact for another year.
Seriously! First of all, according to the CEFC's own 2013 annual report, they made a grand total of $147,000 out of interest income from a single loan of $50,000,000. That is a yield of 0.2%! Go you good thing.
I presume they are talking about investments made after the reporting date. If you look at the annual report again, we have the following investments made after the reporting date.
87,000,000 (July)
353,000,000 (July)
Takes us to a grand total of $490,000,000. There must be another $46 million flying around then to take it to the amount mentioned by Broadbent and co of $536 million. This still leaves another $400 odd million in the kitty though (as in July Treasury paid a nice withdrawal of $811 million from the special account) which i presume is just sitting in Cash account at the moment earning nothing.
But we won't know the quality of these loans until the next annual report. But how can the board of this company say they can get a yield of 7% based on 4 months of investment???? This is purely the company board (and executives) trying to keep their directors fees/salary intact for another year.
Tuesday, November 19, 2013
Do you ever get the feeling that Jessica Hart thinks she is God's gift?
2010 : "If you see me, or another model, in a bar wait until you are spoken too before you speak,”
2013 : "I think what you find is that for a lot of us, we've been working for 14, 15 years; what it takes to make it here comes from experience and confidence and knowing how to be confident with yourself" (when dissing Taylor Swift)
2013 : "I think what you find is that for a lot of us, we've been working for 14, 15 years; what it takes to make it here comes from experience and confidence and knowing how to be confident with yourself" (when dissing Taylor Swift)
Wednesday, October 30, 2013
Carry over Kyoto!
You know the greenies have infiltrated the Climate Change Authority when you read the following in their recent draft report
Australia's commitment to Kyoto was to keep our emissions to 108% of 1990 levels. While you wouldn't read about it, we are actually ahead of the game. Our emissions are actually at 105% of 1990 levels. Well done team!
The thing is, that gives us around 91 MT of emissions we could carryover into our new emissions target if we decided to sign up to the new Kyoto protocol. That's great. Start on the front foot, ahead of the game. But guess what I found in the report
They are recommending we take the 3% and create an even more aggressive target to try and influence other countries to take on more aggressive targets! As if. We have zero influence with the developing world on this regard and China would laugh at us if we decided to suggest they sign up to these aggressive targets. It could be worse of course. Some of the recommendations offered by Green groups proposed voluntarily extinguishing the credits.
Thankfully, we have a Liberal Government in power who will no doubt disregard the advice, but it just goes to show how the Climate Change Authority is not really economically dry when it comes to offering advice.
Australia's commitment to Kyoto was to keep our emissions to 108% of 1990 levels. While you wouldn't read about it, we are actually ahead of the game. Our emissions are actually at 105% of 1990 levels. Well done team!
The thing is, that gives us around 91 MT of emissions we could carryover into our new emissions target if we decided to sign up to the new Kyoto protocol. That's great. Start on the front foot, ahead of the game. But guess what I found in the report
They are recommending we take the 3% and create an even more aggressive target to try and influence other countries to take on more aggressive targets! As if. We have zero influence with the developing world on this regard and China would laugh at us if we decided to suggest they sign up to these aggressive targets. It could be worse of course. Some of the recommendations offered by Green groups proposed voluntarily extinguishing the credits.
Thankfully, we have a Liberal Government in power who will no doubt disregard the advice, but it just goes to show how the Climate Change Authority is not really economically dry when it comes to offering advice.
Reserve Bank Assets - Increasingly sensitive to Foreign Currency
Been having a look at the Reserve Bank of Australian assets after our new Treasurer, Joe Hockey decided to grant the bank a capital injection of 8.8 billion. Nice.
I was wondering why that may be the case. Reserve banks can operate with negative capital reserve if required as they can also print their way out of debt if required (though obviously not in times of higher inflation). In fact, the best time to do that might be at the moment, with inflation fairly low.
But another reason may be sensitivity to interest rates and or foreign currency. The days of Reserve Banks having gold as their main reserve has long gone. It's usually foreign currency and bonds now. So I wanted to see what affect changes of foreign currency, domestic interest rates and gold prices have on the Total Reserves.
So I regressed percentage changes in Total Assets against % changes in those other elements and got the following (Since 2005)
%TR = -0.87*%AUD/US +0.07*%10 years AUS BOND (I removed gold as it wasn't statistically significant at all)
Only the -0.87 is statistically significant at 95% confidence level. So that equates to every 1% increase in AUD/US exchange rate reduces the assets of the Reserve by almost 1% (keeping interest rates constant)
With the capital Reserve currently sitting at just over 2% of total assets, that might explain the urgency of the Capital injection (as the currency would only require 2.5% appreciation against the greenback to wipe it out)***
Maybe Joe is onto something.
**That said, the regression's adjusted RSquared is only 17%, but still goes to show that a high dollar is not the greatest thing from a Reserve point of view
I was wondering why that may be the case. Reserve banks can operate with negative capital reserve if required as they can also print their way out of debt if required (though obviously not in times of higher inflation). In fact, the best time to do that might be at the moment, with inflation fairly low.
But another reason may be sensitivity to interest rates and or foreign currency. The days of Reserve Banks having gold as their main reserve has long gone. It's usually foreign currency and bonds now. So I wanted to see what affect changes of foreign currency, domestic interest rates and gold prices have on the Total Reserves.
So I regressed percentage changes in Total Assets against % changes in those other elements and got the following (Since 2005)
%TR = -0.87*%AUD/US +0.07*%10 years AUS BOND (I removed gold as it wasn't statistically significant at all)
Only the -0.87 is statistically significant at 95% confidence level. So that equates to every 1% increase in AUD/US exchange rate reduces the assets of the Reserve by almost 1% (keeping interest rates constant)
With the capital Reserve currently sitting at just over 2% of total assets, that might explain the urgency of the Capital injection (as the currency would only require 2.5% appreciation against the greenback to wipe it out)***
Maybe Joe is onto something.
**That said, the regression's adjusted RSquared is only 17%, but still goes to show that a high dollar is not the greatest thing from a Reserve point of view
Tuesday, October 29, 2013
Update: Carsales a cluncker Part 2 - Start her up!
Looking in more detail as to why the sell off of CarSales...I think it's all panic selling. The CEO mentioned subdued conditions, but this is a company who pays out 90% of profit as dividends and still has a sustainable growth rate of 5% (due to a ROE of over 50%!). Even the ROA is pretty impressive (34%) Easily making the cost of equity of 10.5% over the last two years.
As for growth, car sales are a pretty good model as they are linked to economic growth but a site like this also links to the secondary market (used cars) which does better when times are tough. A bit of exposure to underdeveloped car markets like Brazil and Thailand completes the picture.
Sure, the model isn't exactly competition free. Lots of potential competitors out there, but with a good, experienenced board well versed in car sales and dealerships, I think this is still a business with potential.
In fact, if I do my calculation of FCFE using the gordon growth model, I have a price target of $12.69. As the shares are trading at around 10.33, this represents an 18% discount.
But I could be wrong again.
Disclaimer : Not an recommendation to invest/not invest in CarSales. Please see your financial advisor.
As for growth, car sales are a pretty good model as they are linked to economic growth but a site like this also links to the secondary market (used cars) which does better when times are tough. A bit of exposure to underdeveloped car markets like Brazil and Thailand completes the picture.
Sure, the model isn't exactly competition free. Lots of potential competitors out there, but with a good, experienenced board well versed in car sales and dealerships, I think this is still a business with potential.
In fact, if I do my calculation of FCFE using the gordon growth model, I have a price target of $12.69. As the shares are trading at around 10.33, this represents an 18% discount.
But I could be wrong again.
Disclaimer : Not an recommendation to invest/not invest in CarSales. Please see your financial advisor.
Carsales a clucker? Doubt it
Carsales has appeared on the ROC radar last night...seems to be a bit shunned for some reason. Big volumes of sales over the last couple of days (average daily volumes is around 800,000, but last two days sold off around 3 million shares a day). Wonder why?
Most technical indicators seem to indicate a buy. ROC below 90, price at the bottom of the bollinger bands etc. Could be an opportunity. Or does the market know something I don't (probably lots). Will have to investigate a little more, but low 10's for this stock seems great value at first look.
Most technical indicators seem to indicate a buy. ROC below 90, price at the bottom of the bollinger bands etc. Could be an opportunity. Or does the market know something I don't (probably lots). Will have to investigate a little more, but low 10's for this stock seems great value at first look.
Friday, October 25, 2013
Being Arian Foster....well at least 20%
Have heard about the novel security being offered in the US concerning the NFL star Arian Foster. He has decided to sell the rights 20% of future earning for the upfront price of $10,000,000. The company that has bought the rights, fantex has in turn decided to issue 1,000,555 shares at $10 a pop to people who want to invest. Interesting stuff. The question I have is if it is a good investment. So I checked out the IPO docs. Couple of red flags
1. Firstly, this is not a growth stock. Arian Foster is 4 years into a NFL career and is currently at the peak of his powers. His previous contract (in the 2nd year of a 5 year one) is probably his best (as he is 27 and when he comes off the current one, he will be 30-31....and definitely on the decline. Post career earnings are unlikely to be as good as his NFL earnings (especially as the deal with FanTex deliberately excludes investment income)
2. As shareholders, you actually are shareholders of a company FanTex Limited rather than Arian Foster. So the Financial Asset could be sold leaving the shareholders with nothing
3. There is no secondary market for the shares. You are basically stuck with them after you have bought them.
4. The company is under no obligation to pay dividends.
5. The company has entered into an agreement with a holding company Fantex Holdings and will pay 5% of earning to them for "Management Services"
6. The stock can be diluted at any time with the addition of new "star's". Also with this initial IPO, there is a dilution that will take around $2 off the share price as current stock is converted to the new share structure.
7. The holding company will control 99% of the voting stock, meaning the shareholders will have no power at all after this offer.
So is it a good deal? Well I will let the fans decide.
Disclaimer: Not a recommendation to invest/not invest with FanTex. See your financial advisor
1. Firstly, this is not a growth stock. Arian Foster is 4 years into a NFL career and is currently at the peak of his powers. His previous contract (in the 2nd year of a 5 year one) is probably his best (as he is 27 and when he comes off the current one, he will be 30-31....and definitely on the decline. Post career earnings are unlikely to be as good as his NFL earnings (especially as the deal with FanTex deliberately excludes investment income)
2. As shareholders, you actually are shareholders of a company FanTex Limited rather than Arian Foster. So the Financial Asset could be sold leaving the shareholders with nothing
3. There is no secondary market for the shares. You are basically stuck with them after you have bought them.
4. The company is under no obligation to pay dividends.
5. The company has entered into an agreement with a holding company Fantex Holdings and will pay 5% of earning to them for "Management Services"
6. The stock can be diluted at any time with the addition of new "star's". Also with this initial IPO, there is a dilution that will take around $2 off the share price as current stock is converted to the new share structure.
7. The holding company will control 99% of the voting stock, meaning the shareholders will have no power at all after this offer.
So is it a good deal? Well I will let the fans decide.
Disclaimer: Not a recommendation to invest/not invest with FanTex. See your financial advisor
Wednesday, October 23, 2013
Same Sex Marriage in the ACT - Think the bride will be left at the altar
While this is primarily a finance/economic blog, occasionally I will comment on other subjects that might be indirectly related to economics, like Climate Change. Another area is marriage.
Generally speaking marriage is good for an economy in that it promotes population growth and civil order, two things important for economic growth.
Same Sex Marriage is a little different. Certainly doesn't promote population growth (hard to have kids when a key component to a process is missing) but there may be an argument for civil order. Love is always a consideration, but as an economic dry, I'm leaving it out of the equation (One cannot live on love alone as they say). Human Rights, while important, is also not really an issue (as while Marriage is defined as a Human Right, the definition of marriage and who is eligible has always been left to country to decide under international law treaties)
Now in the last few days, the Australian Capital Territory has passed a law allowing Same Sex Marriages to be performed in it's territory. The left has responded in celebration....Hooray! Human Rights for all etc.
However, if you look at the Constitution, it doesn't look that great for the laws. I think they will ultimately be overruled by the Commonwealth.
The reason for this pessimism is basically the Constitution. Firstly, in the Constitution’s Section 51(11), it explicitly states that the Federal Government has the power to make laws responsible for Marriage.
Secondly there is Section 109 which states, and I quote "When a law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid"
So that pretty much rules out any state in Australia being able to make laws in respect to Marriage, from a constitutional point of view.
Now someone could argue that the ACT is a territory rather than a state. Very true, young person. Problem is Section 52(i) of the Constitution which states
"The Parliament shall, subject to this Constitution, have exclusive power to make laws for the peace, order, and good government of the Commonwealth with respect to
(i.) The seat of government of the Commonwealth, and all places acquired by the Commonwealth for public purposes"
And the seat of government of the Commonwealth is...drumroll please, the Australian Capital Territory! Yep, that means that the ACT is completely beholden to the Fed's in regards to laws. The Federal Government could just change "Australian Capital Territory (Self-Government) Act 1988 (Cth)" like they did to the Northern Territory's Self-Government Act when that territory got uppity and got Euthanasia legalised back in 1995. All they need is the numbers in the House of Reps (no worries) and the Senate (a bit more difficult at the moment, but probably still an option). Will definitely be fine once the new Senate rocks up in July 2014.
Remember, it's not just the Libs that hold marriage as defined as a union entered into by a man and woman. Plenty of Laborites also believe this (as shown by the votes of the previous federal attempts to change the Marriage Act)
By my reading, the only way Same Sex Marriage could get up in the near future would be to take marriage out of it and call it "Same Sex Civil Unions" (with all the rights and legal protections of marriage). I think politicians on both sides could get this up at a Federal Level. But will the Gay and Lesbian Lobby see this, or will they still hold out for the "marriage" bouquet to be thrown at them.
If they wait, they could be waiting a long time.
Generally speaking marriage is good for an economy in that it promotes population growth and civil order, two things important for economic growth.
Same Sex Marriage is a little different. Certainly doesn't promote population growth (hard to have kids when a key component to a process is missing) but there may be an argument for civil order. Love is always a consideration, but as an economic dry, I'm leaving it out of the equation (One cannot live on love alone as they say). Human Rights, while important, is also not really an issue (as while Marriage is defined as a Human Right, the definition of marriage and who is eligible has always been left to country to decide under international law treaties)
Now in the last few days, the Australian Capital Territory has passed a law allowing Same Sex Marriages to be performed in it's territory. The left has responded in celebration....Hooray! Human Rights for all etc.
However, if you look at the Constitution, it doesn't look that great for the laws. I think they will ultimately be overruled by the Commonwealth.
The reason for this pessimism is basically the Constitution. Firstly, in the Constitution’s Section 51(11), it explicitly states that the Federal Government has the power to make laws responsible for Marriage.
Secondly there is Section 109 which states, and I quote "When a law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid"
So that pretty much rules out any state in Australia being able to make laws in respect to Marriage, from a constitutional point of view.
Now someone could argue that the ACT is a territory rather than a state. Very true, young person. Problem is Section 52(i) of the Constitution which states
"The Parliament shall, subject to this Constitution, have exclusive power to make laws for the peace, order, and good government of the Commonwealth with respect to
(i.) The seat of government of the Commonwealth, and all places acquired by the Commonwealth for public purposes"
And the seat of government of the Commonwealth is...drumroll please, the Australian Capital Territory! Yep, that means that the ACT is completely beholden to the Fed's in regards to laws. The Federal Government could just change "Australian Capital Territory (Self-Government) Act 1988 (Cth)" like they did to the Northern Territory's Self-Government Act when that territory got uppity and got Euthanasia legalised back in 1995. All they need is the numbers in the House of Reps (no worries) and the Senate (a bit more difficult at the moment, but probably still an option). Will definitely be fine once the new Senate rocks up in July 2014.
Remember, it's not just the Libs that hold marriage as defined as a union entered into by a man and woman. Plenty of Laborites also believe this (as shown by the votes of the previous federal attempts to change the Marriage Act)
By my reading, the only way Same Sex Marriage could get up in the near future would be to take marriage out of it and call it "Same Sex Civil Unions" (with all the rights and legal protections of marriage). I think politicians on both sides could get this up at a Federal Level. But will the Gay and Lesbian Lobby see this, or will they still hold out for the "marriage" bouquet to be thrown at them.
If they wait, they could be waiting a long time.
Tuesday, October 22, 2013
Qantas a buy? Might be worth while to ride the lightning
Qantas, of all companies, appeared on my ROC scanner last night...it has dropped a fair bit of value over the last couple of days since the AGM. Currently sitting at $1.30. So I'm curious...is it worth a buy.
Fundamentals don't look great. Making a minimal ROE of 0.1% (or basically nothing). Compared to the WACC I have calculated of around 6% (way below the 10.5% used by Qantas themselves), it still isn't making it's costs of capital meaning that ultimately, the book value will continue to drop.
Current tangible book value for share is $2.42, but I'm not surprised that it isn't trading at that. If a company doesn't make its WACC, book value only goes one way....down.
All that said, $1.30 does look cheap. Using DCF methods using FCFF of $330 million and the WACC of 6% and a growth rate of between (-2% to -3%....the guidance given for yields at the AGM), I have a price target of between $1.80 and $1.58...at least a 21% premium to the current price.
Boarding!
Disclaimer: This is not a recommendation to invest/not invest in Qantas. Please see your financial advisor.
Fundamentals don't look great. Making a minimal ROE of 0.1% (or basically nothing). Compared to the WACC I have calculated of around 6% (way below the 10.5% used by Qantas themselves), it still isn't making it's costs of capital meaning that ultimately, the book value will continue to drop.
Current tangible book value for share is $2.42, but I'm not surprised that it isn't trading at that. If a company doesn't make its WACC, book value only goes one way....down.
All that said, $1.30 does look cheap. Using DCF methods using FCFF of $330 million and the WACC of 6% and a growth rate of between (-2% to -3%....the guidance given for yields at the AGM), I have a price target of between $1.80 and $1.58...at least a 21% premium to the current price.
Boarding!
Disclaimer: This is not a recommendation to invest/not invest in Qantas. Please see your financial advisor.
Friday, October 18, 2013
WACC of Aurizon: 7.72%
Was reading the AFR as usual, and discovered an article about QLD rail (now known as Aurizon), specifically the WACC estimate. Weighted average costs of capital are important in Government regulation as most regulations allow monopolies to earn at least their WACC in regards to prices. So the higher the WACC, the more the monpoly can charge.
Aurizon believe their WACC is 8.17%, Queensland Resources Council (a lobby group for miners who pay to use the trains) believe it is 5.6%. You know what, I recon it is right in the middle. Lets see.
Formula for the WACC is usually the (weighted interest rate of borrowings)*(1-TaxRate)*(% of Debt on Capital) + (Cost of Equity Capital)*(% of Equity on Total Capital).
Firstly, from the Annual report: Average weighted interest rate of Aurizon borrowings over the last 2 years = 0.055.
Tax Rate = 0.3 (Australian Company tax rate)
Average Borrowings over the last two years (from 2013 Annual report) = $1.84 Billion
Average Equity Shares Outstanding over last two years (from 2013 Annual Report) = 2.348 Billion
Average Share Price over the last two years (From Yahoo Finance) ($3.78)
Therefore Equity total = $8.878 Billion
Total Capital = 10.78 Billion (17% debt, 83% equity). Based on this, WACC is likely to be on the higher side (as Equity is more expensive than debt)
Calculating the cost of Equity. The adjusted Beta of Aurizon (based on last 2.5 years of Aurizon and ASX200 returns) = 0.7262
Risk Free rate of 0.0382 and Market risk premium of 0.0352 already calculated on this blog
Using CAPM formula, this gives us a rate of return of 0.0637. Add on an average dividend yield over the last two years of 2.1%, gives you a cost of equity capital being 0.0847.
So putting all this info into the WACC formula gives you a grand WACC of Aurizon being 0.07721 (or 7.721%)
So how does this compare to those original forecasts. Well, no doubt that Aurizon has put on a hefty 450 basis points onto their estimate. But QRC would be getting an absolute bargain with their estimate of 5.6% (or a 2.1% discount). Go back to Finance school guys.
Aurizon believe their WACC is 8.17%, Queensland Resources Council (a lobby group for miners who pay to use the trains) believe it is 5.6%. You know what, I recon it is right in the middle. Lets see.
Formula for the WACC is usually the (weighted interest rate of borrowings)*(1-TaxRate)*(% of Debt on Capital) + (Cost of Equity Capital)*(% of Equity on Total Capital).
Firstly, from the Annual report: Average weighted interest rate of Aurizon borrowings over the last 2 years = 0.055.
Tax Rate = 0.3 (Australian Company tax rate)
Average Borrowings over the last two years (from 2013 Annual report) = $1.84 Billion
Average Equity Shares Outstanding over last two years (from 2013 Annual Report) = 2.348 Billion
Average Share Price over the last two years (From Yahoo Finance) ($3.78)
Therefore Equity total = $8.878 Billion
Total Capital = 10.78 Billion (17% debt, 83% equity). Based on this, WACC is likely to be on the higher side (as Equity is more expensive than debt)
Calculating the cost of Equity. The adjusted Beta of Aurizon (based on last 2.5 years of Aurizon and ASX200 returns) = 0.7262
Risk Free rate of 0.0382 and Market risk premium of 0.0352 already calculated on this blog
Using CAPM formula, this gives us a rate of return of 0.0637. Add on an average dividend yield over the last two years of 2.1%, gives you a cost of equity capital being 0.0847.
So putting all this info into the WACC formula gives you a grand WACC of Aurizon being 0.07721 (or 7.721%)
So how does this compare to those original forecasts. Well, no doubt that Aurizon has put on a hefty 450 basis points onto their estimate. But QRC would be getting an absolute bargain with their estimate of 5.6% (or a 2.1% discount). Go back to Finance school guys.
Monday, October 14, 2013
Twitter Vs Facebook - The Directors cut
The first in a series of posts comparing the Twitter IPO to Facebook. First up, the board of Directors
Facebook :-
Mark Zukerberg
Sheryl K. Sandberg
Erskine B. Bowles
Marc L. Andreessen
James W. Breyer
Susan D. Desmond-Hellman
Donald E. Graham
Reed Hastings
Peter A. Thiel
Vs
Twitter :-
Peter Fenton
Richard Costolo
David Rosenblatt
Evan Williams
Peter Chernin
Peter Currie
Jack Dorsey
Comments : All star cast of Facebook vs some quality at Twitter. 22% of women on Facebook vs 0% on the Twitboard. At least three IT visionaries on the Facebook board in Zukerberg, Andreesen and Hastings, plus serious political clout in Bowles and Sandberg.
Winner is : Facebook!
Facebook :-
Mark Zukerberg
Sheryl K. Sandberg
Erskine B. Bowles
Marc L. Andreessen
James W. Breyer
Susan D. Desmond-Hellman
Donald E. Graham
Reed Hastings
Peter A. Thiel
Vs
Twitter :-
Peter Fenton
Richard Costolo
David Rosenblatt
Evan Williams
Peter Chernin
Peter Currie
Jack Dorsey
Comments : All star cast of Facebook vs some quality at Twitter. 22% of women on Facebook vs 0% on the Twitboard. At least three IT visionaries on the Facebook board in Zukerberg, Andreesen and Hastings, plus serious political clout in Bowles and Sandberg.
Winner is : Facebook!
Oroton in the toilet?
Oroton, the luxury goods brand has come onto the Goat's ROC tracker as a possible undervalued company, but I'm starting to think it looks more trash than treasure.
A few reasons :-
Firstly, being a luxury goods company, generally not recession proof. In Australia, unemployment is predicted to rise and economic growth to reduce, not ideal conditions for a high end retailer.
Secondly, they just lost the Ralph Lauren Licence which provided close to 50% of revenue. The replacement, Brooks Brothers has come on line, true, but lets be honest, Brooks Brothers is no Ralph Lauren.
Thirdly, take out discontinued operations and the 12 million they received from Ralph Lauren and the profits look to be falling and cash flow starting to turn south again.
Fourthly, they have limited exposure to Asia (just 3% of group sales)
Lastly, the board has no women on it, since the departure of the CEO last year. Not a good look for a company that caters primarily to women.
So all, up I won't be investing. Better options out there is you want to invest in a Retailer.
Disclosure: Not a recommendation to invest/not invest in Oroton. Please see a Financial advisor
A few reasons :-
Firstly, being a luxury goods company, generally not recession proof. In Australia, unemployment is predicted to rise and economic growth to reduce, not ideal conditions for a high end retailer.
Secondly, they just lost the Ralph Lauren Licence which provided close to 50% of revenue. The replacement, Brooks Brothers has come on line, true, but lets be honest, Brooks Brothers is no Ralph Lauren.
Thirdly, take out discontinued operations and the 12 million they received from Ralph Lauren and the profits look to be falling and cash flow starting to turn south again.
Fourthly, they have limited exposure to Asia (just 3% of group sales)
Lastly, the board has no women on it, since the departure of the CEO last year. Not a good look for a company that caters primarily to women.
So all, up I won't be investing. Better options out there is you want to invest in a Retailer.
Disclosure: Not a recommendation to invest/not invest in Oroton. Please see a Financial advisor
Wednesday, October 9, 2013
The Job's effect : Did Steve Job's death affect Apple.
Well obviously! But what I really wanted to know if it affected the share price. Lets look at some comparisons. Here are the stcks prices of Apple (and others) in comparison with the Dow Jones Industrial Average with the base year being October 2009 (monthly stock prices, no dividends)
So as shown, if you invested in Apple or Amazon, you would have outperformed the Dow by around 60%. Go team. The others, you would be treading water a bit, with the exception of Microsoft where you would be off roughly 20%. Poor Bill Gates!
However, if you make the date of Steve Job's death the base year (October 2011), it gets a little murkier
On this reading, Apple is pretty much treading water with the index, along with Microsoft, IBM is 20% off the Dow and it's Google and Amazon that are outperforming the market by around 16%.
So I don't think there is any doubt that Steve Jobs' death has made Apple a less attractive proposition from an investor point of view (even with that temporary surge in 2012), with that money going into Google and Amazon. Amazon, looks like the only sure bet from either 2009 or 2011. Go the cloud!
However, if you make the date of Steve Job's death the base year (October 2011), it gets a little murkier
On this reading, Apple is pretty much treading water with the index, along with Microsoft, IBM is 20% off the Dow and it's Google and Amazon that are outperforming the market by around 16%.
So I don't think there is any doubt that Steve Jobs' death has made Apple a less attractive proposition from an investor point of view (even with that temporary surge in 2012), with that money going into Google and Amazon. Amazon, looks like the only sure bet from either 2009 or 2011. Go the cloud!
Wednesday, October 2, 2013
Market Risk Premium for September 13 - 3.52%
Time for another update of the ASX Market Risk Premium. I would assume there has been some improvement here as the ASX has increased in value.
So using our 2.5 years of daily returns of the ASX200, I calculate a capital gain p.a of 2.68%. Combined with the average dividend yield over this period of 4.64%, that gives us a market return of 7.34% (not too shabby)
Looking at the average 10 year government bond rate over the period as a proxy, we have our risk free rate being 3.82%
Which means that our market risk premium is now 3.52%
So using our 2.5 years of daily returns of the ASX200, I calculate a capital gain p.a of 2.68%. Combined with the average dividend yield over this period of 4.64%, that gives us a market return of 7.34% (not too shabby)
Looking at the average 10 year government bond rate over the period as a proxy, we have our risk free rate being 3.82%
Which means that our market risk premium is now 3.52%
Wednesday, September 25, 2013
Is CabCharge a buy....technically getting there
Been looking at the technical indicators of cab Charge after my ROC checker identified it as possible buy. It has certainly dropped a lot of value so quite a few technical indicators are pointing that it might be undervalued. Firstly, the Bollinger bands...the price is cutting through the bottom band which is usually a buy signal.
Then there is the MACD. I have calculated that when the MACD goes through the signal line on the up at any level below -0.2, that is a buy signal. Not quite there, but close.
Definitely a watch this space...
Thursday, September 19, 2013
Freelancer worth 400 million??? Bit of froth there
Been reading in the press about Freelancer, the short term project resourcing site owned by Matt Barrie. Apparently there is talk that he turned down a $400 million dollar offer to sell from a " Japanese recruitment company". Somehow, I find that hard to believe.
Lets look at it from a valuation model. According to the Afr today, the site has turned over $1.2 billion in project costs from 2004. So that is roughly $133 million a year. But the site only sees around 3% of that figure, so revenue per year of the site is actually $4 million a year.
Now if we assume the same Ebitda margin as a comparable site, say carsales.com.au of 56%, that leaves us with an ebitda per year of around $2.2 million.
Now car sales has a market capitalization of around $2.7 billion, so is trading at a multiple of around 22 times ebitda. If we assume the same multiple, that takes us to a valuation of $50 million, a lot smaller than that $400 million figure that was bandied about.
Even if we assume that the site has made $600 million in the last three years, or $200 million a year, we are looking at a valuation of around $75 million.
And that is even before you run the Porters 5 forces framework over it. A site that has basically no barriers of entry, whose entire reason for being will drive down project costs due to competition and hence drive down revenue that will flow to the site doesn't really look like a long term proposition. First mover advantage is really all there is.
The Japanese can be a crazy nation, but when it comes to the dollars, they play it pretty cold. To me, the recent press smells like a beat up to try and raise the price expectation of the impending ipo. I will be very interested to read the prospectus if he valuation is any higher than around $ 100 million. As it would be
But I could be wrong.
Lets look at it from a valuation model. According to the Afr today, the site has turned over $1.2 billion in project costs from 2004. So that is roughly $133 million a year. But the site only sees around 3% of that figure, so revenue per year of the site is actually $4 million a year.
Now if we assume the same Ebitda margin as a comparable site, say carsales.com.au of 56%, that leaves us with an ebitda per year of around $2.2 million.
Now car sales has a market capitalization of around $2.7 billion, so is trading at a multiple of around 22 times ebitda. If we assume the same multiple, that takes us to a valuation of $50 million, a lot smaller than that $400 million figure that was bandied about.
Even if we assume that the site has made $600 million in the last three years, or $200 million a year, we are looking at a valuation of around $75 million.
And that is even before you run the Porters 5 forces framework over it. A site that has basically no barriers of entry, whose entire reason for being will drive down project costs due to competition and hence drive down revenue that will flow to the site doesn't really look like a long term proposition. First mover advantage is really all there is.
The Japanese can be a crazy nation, but when it comes to the dollars, they play it pretty cold. To me, the recent press smells like a beat up to try and raise the price expectation of the impending ipo. I will be very interested to read the prospectus if he valuation is any higher than around $ 100 million. As it would be
But I could be wrong.
Wednesday, August 28, 2013
Battle of the ISP's - M2 leading the way, TPG and Telstra underperforming
Been looking at the Australian Internet stocks and their comparative performance over the last three years. Everyone always talks about Telstra and TPG being market darlings, but really it is M2 Communications and iinet that are outperforming, at over 3 times the gains of the ASX200. You would have done well investing in those stocks from 2010!
Tuesday, August 27, 2013
AustBrokers still going strong - New Price Target of $11.80
Still can't believe why Austbrokers (AUB.AX) is neglected by investors. Great final year results (increases in dividends, revenues and profits) and the initial response on the shareprice is to sell???
Sanity prevailed at the end of the session though, when the shareprice went back up to $11.05 (around a 0.35% gain for the day) I still think the price is under what it should be however. According to the offered growth predictions of between 5-10%, I think the price should be around $11.80 (so I think it is trading at a 6% discount or so at the moment). Maybe it is the miniscule dividend yield of 3.2% that is scaring people away. But always remember that a dollar of dividend is exactly the same as a dollar of capital gain.
Anyway, the usual disclaimer applies (Not a recommendation to invest/not invest in Austbrokers. Please talk to your financial advisors etc)
Sanity prevailed at the end of the session though, when the shareprice went back up to $11.05 (around a 0.35% gain for the day) I still think the price is under what it should be however. According to the offered growth predictions of between 5-10%, I think the price should be around $11.80 (so I think it is trading at a 6% discount or so at the moment). Maybe it is the miniscule dividend yield of 3.2% that is scaring people away. But always remember that a dollar of dividend is exactly the same as a dollar of capital gain.
Anyway, the usual disclaimer applies (Not a recommendation to invest/not invest in Austbrokers. Please talk to your financial advisors etc)
Friday, August 23, 2013
FairFax Media Results : Still a dog, but getting better
Been running the ruler over the FairFax Media results which were released yesterday...still not great.
Big problems regarding the revenue at the moment, so much so that I think there is some earnings management going on.
Firstly, the 2012 revenues were restated 4% lower (from the original 2.3 billion to 2.1 billion). Secondly, they decided to change the circulation revenue reporting from net (with distribution costs included) to gross, with distribution costs in the Expenses. Not a good look. I think there is a fair bit of pressure for the company to meet their revenue targets.
I wonder why companies do this sort of earnings management, as it all is revealed in the cash flow anyway. Cash flow from operations dropped 30% over the year.
No joy in regards to making it's cost of capital. I calculated the cost of capital of Fairfax to be around 9% and that is not being hit at the moment. But most of this is already piced in.
Currently, I have a pice target of 63 cents a share, which is an improvement of the current 58 cents a share, by around 10%. Might be worth a buy and hold until it hits that price, but I don't see a major upside to this investment until revenue starts to improve.
Big problems regarding the revenue at the moment, so much so that I think there is some earnings management going on.
Firstly, the 2012 revenues were restated 4% lower (from the original 2.3 billion to 2.1 billion). Secondly, they decided to change the circulation revenue reporting from net (with distribution costs included) to gross, with distribution costs in the Expenses. Not a good look. I think there is a fair bit of pressure for the company to meet their revenue targets.
I wonder why companies do this sort of earnings management, as it all is revealed in the cash flow anyway. Cash flow from operations dropped 30% over the year.
No joy in regards to making it's cost of capital. I calculated the cost of capital of Fairfax to be around 9% and that is not being hit at the moment. But most of this is already piced in.
Currently, I have a pice target of 63 cents a share, which is an improvement of the current 58 cents a share, by around 10%. Might be worth a buy and hold until it hits that price, but I don't see a major upside to this investment until revenue starts to improve.
Thursday, August 22, 2013
Is a correction of the ASX 200 coming...Looks possible
Been looking at the ASX200 index which is currently sitting on 5100 and wondering if it is due for a correction. There does appear to be some indicators that are pointing to a downward movement for the asx200 in the near future
First, my Gordon growth model formula. Using the figures from the 1st of August, and the current RBA growth measure of 2.25%, I have the ASX200 at 4880.
Secondly, the P/E ratio. According to the RBA, this is at 17.2 for July. Based of the 2.5 year historical average of P/E of 15, again it looks over bought.
Lastly, looking at the technical indicators. These aren't two bad, but the price is above the 20 day and 60 day averages, the ROC has just jumped below 100, RSI is heading down, price is at the middle of the bollinger bands and the oscillators are around 50 and heading down.
Wouldn't take much for a movement down in my opinion.
Disclaimer : Not a recommendation, just an observation. In you want to invest, please see a Financial Advisor
First, my Gordon growth model formula. Using the figures from the 1st of August, and the current RBA growth measure of 2.25%, I have the ASX200 at 4880.
Secondly, the P/E ratio. According to the RBA, this is at 17.2 for July. Based of the 2.5 year historical average of P/E of 15, again it looks over bought.
Lastly, looking at the technical indicators. These aren't two bad, but the price is above the 20 day and 60 day averages, the ROC has just jumped below 100, RSI is heading down, price is at the middle of the bollinger bands and the oscillators are around 50 and heading down.
Wouldn't take much for a movement down in my opinion.
Disclaimer : Not a recommendation, just an observation. In you want to invest, please see a Financial Advisor
Friday, August 16, 2013
Monday, August 12, 2013
Looks like 150 hours wasn't enough :-(
No luck on the CFA Level 2 this year. Boo hiss. Failed band 8. A bit disappointing, but just goes to show how tough the exam was (42% pass rate this year).
I did really well in some sections (alternative investments, quantatitive methods to name a couple), but lost out a bit in some of the other sections, including Ethics which surprised me (usually a strength).
Oh well, back to the drawing board. Haven't committed to doing the exam again next year...will wait and see how I am traveling a little closer to the end of this year.
I did really well in some sections (alternative investments, quantatitive methods to name a couple), but lost out a bit in some of the other sections, including Ethics which surprised me (usually a strength).
Oh well, back to the drawing board. Haven't committed to doing the exam again next year...will wait and see how I am traveling a little closer to the end of this year.
Friday, July 12, 2013
Wednesday, July 10, 2013
Update: Market Risk Premium of the ASX in June 2013: 1.15%!
Its that time again...time to update the Market Risk Premium of the ASX.
It's been a crazy time on the markets since April so I expect a drop.
Using the same methodology as always (average daily returns over the last 2.5 years), we have a market return (capital) of just 0.52% (pretty ordinary). Adding on the average Divident yield over that same period of 4.61% gives a grand total for Market Return of 5.13% (down from the April Figure by 2.64%...ouch)
Subtract the average 10 year Australian Government Bond rate over that period of 3.98% (again down by around 0.2%) and we get a Market Risk Premium of 1.15% (a drop of 2.6%)
It's been a crazy time on the markets since April so I expect a drop.
Using the same methodology as always (average daily returns over the last 2.5 years), we have a market return (capital) of just 0.52% (pretty ordinary). Adding on the average Divident yield over that same period of 4.61% gives a grand total for Market Return of 5.13% (down from the April Figure by 2.64%...ouch)
Subtract the average 10 year Australian Government Bond rate over that period of 3.98% (again down by around 0.2%) and we get a Market Risk Premium of 1.15% (a drop of 2.6%)
Tuesday, July 9, 2013
Monday, July 8, 2013
Fairfax Media VS News Corp - The directors cut
As you know, I have been looking at whether to invest in Fairfax Media. The elephant in the room, in regards to this decision, is the new News Corp. Would it be better to invest in that company instead?
One of the things I like to do is look at the directors...these are the guys who will be maximising shareholder returns (hopefully) so a pretty key part of analysing a business in my opinion.
In my opinion, it's great to see independent directors, but I also like to see some experience in the business they are looking after.
Fairfax Directors
Roger Corbett AO, Chairman - Management Experience: Retail - Other Hobbies: RBA, Walmart Director
Michael Anderson - Management Experience: Radio - Other Hobbies
Jack Cowin - Management Experience: Fast Food - Other Hobbies: Director of TEN Media
Greg Hywood, Chief Executive Officer and Managing Director
Sandra McPhee AM - Management Experience: Aviation. Other Hobbies: Professional Director
James Millar AM - Management Experience: Accountancy. Other Hobbies: Professional Director
Sam Morgan - Management Experience: IT. Other Hobbies: Philanthropy
Linda Nicholls AO - Management Experience: Economics Other Hobbies. Professional Director
Peter Young AM - Management Experience: Investment Banking.
Not a lot of Media Experience in that lot (2 out of 9)....Also, not very diverse. (2 out of 9 are women) - 22%. 4 Countries represented though....
Contrast this with the international Flavour and media heavy that is the new News Corp
K. Rupert Murdoch, Executive Chairperson -Management Experience - Media
Peter L. Barnes - Management Experience - Tobacco
José MarÃa Aznar - Management Experience - Spanish Public Service
Natalie Bancroft - Management Experience - None - Opera Singer
Elaine L. Chao - Management Experience - US Public Service
John Elkann - Management Experience - Italian Industry and Media
Joel I. Klein - Management Experience - US Public Service
James R. Murdoch - Management Experience - Media
Lachlan K. Murdoch - Management Experience - Media
Ana Paula Pessoa - Management Experience - South American Media
Masroor Siddiqui - Management Experience - Investment Banking
Robert J. Thomson - CEO
6 directors have media experience. 3 have Government links. 5 countries represented. 3 out of 12 are women (25%)
Regardless of the fact that Rupert is executive chairperson, it looks like from a quality board perspective, News Corp might be a better buy.
One of the things I like to do is look at the directors...these are the guys who will be maximising shareholder returns (hopefully) so a pretty key part of analysing a business in my opinion.
In my opinion, it's great to see independent directors, but I also like to see some experience in the business they are looking after.
Fairfax Directors
Roger Corbett AO, Chairman - Management Experience: Retail - Other Hobbies: RBA, Walmart Director
Michael Anderson - Management Experience: Radio - Other Hobbies
Jack Cowin - Management Experience: Fast Food - Other Hobbies: Director of TEN Media
Greg Hywood, Chief Executive Officer and Managing Director
Sandra McPhee AM - Management Experience: Aviation. Other Hobbies: Professional Director
James Millar AM - Management Experience: Accountancy. Other Hobbies: Professional Director
Sam Morgan - Management Experience: IT. Other Hobbies: Philanthropy
Linda Nicholls AO - Management Experience: Economics Other Hobbies. Professional Director
Peter Young AM - Management Experience: Investment Banking.
Not a lot of Media Experience in that lot (2 out of 9)....Also, not very diverse. (2 out of 9 are women) - 22%. 4 Countries represented though....
Contrast this with the international Flavour and media heavy that is the new News Corp
K. Rupert Murdoch, Executive Chairperson -Management Experience - Media
Peter L. Barnes - Management Experience - Tobacco
José MarÃa Aznar - Management Experience - Spanish Public Service
Natalie Bancroft - Management Experience - None - Opera Singer
Elaine L. Chao - Management Experience - US Public Service
John Elkann - Management Experience - Italian Industry and Media
Joel I. Klein - Management Experience - US Public Service
James R. Murdoch - Management Experience - Media
Lachlan K. Murdoch - Management Experience - Media
Ana Paula Pessoa - Management Experience - South American Media
Masroor Siddiqui - Management Experience - Investment Banking
Robert J. Thomson - CEO
6 directors have media experience. 3 have Government links. 5 countries represented. 3 out of 12 are women (25%)
Regardless of the fact that Rupert is executive chairperson, it looks like from a quality board perspective, News Corp might be a better buy.
Wednesday, July 3, 2013
IS Fairfax Media a dog? Seems to be barking...
I was running the ruler over FairFax Media the other day...was thinking about throwing some money at it as it is certainly trading at low levels. But when looking at stocks that have been reduced in value, you need to see whether the stock is undervalued or whether there are legitimate reasons for the decrease.
In the case of FXJ, it seems it might be the later.
Looking over the 2012 annual report, I just can't see many redeeming features. Intangible assets are still sky high (even after massive impairments in 2012) making up over 62% of total assets and 120% of net assets...meaning effectively it's book value is negative.
Even with the massive losses over the last year, it still is paying out a 3 cent dividend meaning $70 million is taken out of the accounts each year that could be spent on...oh well, you know, positive NPV projects that might increase value. Without a dividend cut there won't be be increase in the share price.
I calculated the cost of capital as around 15% so effectively the company needs to earn around $300 million a year to be economically profitable (based on net assets of 2 billion)...not even close to that at the moment. So those net assets will be only going one way....down.
Could the problem be management? Well it has been in the digital media realm for the last few years but only recently appointed a CIO. Not a good sign. Directors have good skills in retail, Investment Banking, even fast food but skills in digital media (or media in general) are thin on the ground. They all seem to have a lot on their plate as well...lots of other chairmanships/directorships to keep them occupied.
Then there are the future plans. Paywalls on media websites are a great idea, but the problem with a politically left leaning website is that the left never want to pay for anything. They believe that it is their right to access free news so I don't see them subscribing in any great numbers. The only website with a paywall currently in the Fairfax realm is the AFR (a rightish business style website), and while profitable, it has a pretty low profit margin (i.e around 5%) . So these paywalls are not going to bring in the big dollars...
Advertising is picking up, but again, the margins are not high on digital ads.
The only thing keeping fairfax alive is Regional media....bringing in 26% of revenue, but over 46% of EBIT. Should be a source of focus instead of hitting the web.
The one pece of good news that I can see is the company is not close to hitting it's credit limits. While in 2012, it came close....(I calculated the interest coverage ratio to be 2.51 at one stage.....), based on estimates of 2013 earnings, it's probably going to be around 4 now (after the sale of Trade Me)
So how to make it profitable? I think only sale to private equity (who might be able to reduce the intangibles and remove the dividends without shareholder complaint) might be the real way of fixing the issue. Shades of Billabong in Fairfax current predicament to me.
Disclaimer: Not a recommendation to invest/not invest in FairFax Media. See your financial advisor etc
In the case of FXJ, it seems it might be the later.
Looking over the 2012 annual report, I just can't see many redeeming features. Intangible assets are still sky high (even after massive impairments in 2012) making up over 62% of total assets and 120% of net assets...meaning effectively it's book value is negative.
Even with the massive losses over the last year, it still is paying out a 3 cent dividend meaning $70 million is taken out of the accounts each year that could be spent on...oh well, you know, positive NPV projects that might increase value. Without a dividend cut there won't be be increase in the share price.
I calculated the cost of capital as around 15% so effectively the company needs to earn around $300 million a year to be economically profitable (based on net assets of 2 billion)...not even close to that at the moment. So those net assets will be only going one way....down.
Could the problem be management? Well it has been in the digital media realm for the last few years but only recently appointed a CIO. Not a good sign. Directors have good skills in retail, Investment Banking, even fast food but skills in digital media (or media in general) are thin on the ground. They all seem to have a lot on their plate as well...lots of other chairmanships/directorships to keep them occupied.
Then there are the future plans. Paywalls on media websites are a great idea, but the problem with a politically left leaning website is that the left never want to pay for anything. They believe that it is their right to access free news so I don't see them subscribing in any great numbers. The only website with a paywall currently in the Fairfax realm is the AFR (a rightish business style website), and while profitable, it has a pretty low profit margin (i.e around 5%) . So these paywalls are not going to bring in the big dollars...
Advertising is picking up, but again, the margins are not high on digital ads.
The only thing keeping fairfax alive is Regional media....bringing in 26% of revenue, but over 46% of EBIT. Should be a source of focus instead of hitting the web.
The one pece of good news that I can see is the company is not close to hitting it's credit limits. While in 2012, it came close....(I calculated the interest coverage ratio to be 2.51 at one stage.....), based on estimates of 2013 earnings, it's probably going to be around 4 now (after the sale of Trade Me)
So how to make it profitable? I think only sale to private equity (who might be able to reduce the intangibles and remove the dividends without shareholder complaint) might be the real way of fixing the issue. Shades of Billabong in Fairfax current predicament to me.
Disclaimer: Not a recommendation to invest/not invest in FairFax Media. See your financial advisor etc
Wednesday, June 26, 2013
CFA Level 2 Exam - Review
First post back after the rigors of the CFA Exam Level 2. A couple of notes
1. Can I just say how much I hate going out to HomeBush Bay to do the exam. Limited Coffee facilities, limited food options, limited beer options after the event. Please move it!!!
2. I had a shocker in the first exam...I blame it on the failure to make myself a coffee in the morning. Rookie mistake!! Found the second part a little more to my liking (which seems to be the reverse of alot of people on the CFA forums remarkably enough)
3. Generally speaking, I found the two exams quite difficult. I can't really discuss the exam (as it would break the CFA Candidate rules) but I found it tricky and was quite pushed for time for most of it. Harder than Level 1.
4. They say it takes an average of 300 hours preparation to pass the exam. I probably did a total of between 150-200 hours so it will be interesting to see what happens when the results are posted. D-Day is July 23rd (US time), which is around 2 AM on the 24th for those of us in the Antipodes. Still don't know if I will stay up.....(who am I kidding, I will be up!)
We shall see!!!!
1. Can I just say how much I hate going out to HomeBush Bay to do the exam. Limited Coffee facilities, limited food options, limited beer options after the event. Please move it!!!
2. I had a shocker in the first exam...I blame it on the failure to make myself a coffee in the morning. Rookie mistake!! Found the second part a little more to my liking (which seems to be the reverse of alot of people on the CFA forums remarkably enough)
3. Generally speaking, I found the two exams quite difficult. I can't really discuss the exam (as it would break the CFA Candidate rules) but I found it tricky and was quite pushed for time for most of it. Harder than Level 1.
4. They say it takes an average of 300 hours preparation to pass the exam. I probably did a total of between 150-200 hours so it will be interesting to see what happens when the results are posted. D-Day is July 23rd (US time), which is around 2 AM on the 24th for those of us in the Antipodes. Still don't know if I will stay up.....(who am I kidding, I will be up!)
We shall see!!!!
Friday, May 31, 2013
CFA Exam tomorrow on 1st of June in Sydney! Good Luck!!!
300 hours of study boils down to 6 hours of Exam. Good luck to those making the pilgrimage out to Olympic Park in Sydney tomorrow, especially those joining me for Level 2!
Exam tips from someone who passed Level 1 (after the second time)
1. Read the question!
2. Read the question!
3. Watch your time
4. Read the question!
5. Coffee is key at the half time break. I found my mind turning to mush after the first exam so needed the coffee to help get me back into the swing.
6. Stay positive.
7. And lastly, read the question! (Seriously, the answer usually depends on the assumptions in the question....IFRS vs GAAP, Whether the investments are held for trading/until maurity etc. The first exam effort, I had a lot of problems with this as I made the wrong assumptions constantly)
All the Best!
Exam tips from someone who passed Level 1 (after the second time)
1. Read the question!
2. Read the question!
3. Watch your time
4. Read the question!
5. Coffee is key at the half time break. I found my mind turning to mush after the first exam so needed the coffee to help get me back into the swing.
6. Stay positive.
7. And lastly, read the question! (Seriously, the answer usually depends on the assumptions in the question....IFRS vs GAAP, Whether the investments are held for trading/until maurity etc. The first exam effort, I had a lot of problems with this as I made the wrong assumptions constantly)
All the Best!
Tuesday, May 28, 2013
David Jones Vs Myer - The Grudge match (Relatively Speaking)
So who is winning the battle of the Retail Giants? So far, both are losing, But Myer is losing less (looks like there are more Jennifer Hawkins fans in the investment community than Megan Gale/Miranda Kerr appreciators)
97% consensus in the Peer Reviewed Literature that humans are causing climate change? I'm skeptical (of the science)
From the actual research (John Cook et al 2013 Environ. Res. Lett. 8 024024)
I don't know how you can say that this is a 97% consensus? I would say its a 32.6% consensus of the Climate Peer Reviewed Literature that humans are responsible (in at least some way) for Global Warming.
For mine, this survey says more about the Research dollar. That of the politically inclined or politically financed climate research; 97.1% of that is pro AGW vs 2.9% going to anti-AGW. So much for all that money being spent by Oil Companies and Big Coal in funding think tanks and the like....not getting a great return on their investment.
Wednesday, May 22, 2013
Will the decrease in Aussie dollar lift equities? Not necesarily
Check out this graph! (daily stats from Jan4 2010 to May21 2013 - yahoo.com/finance for ASX200, rba.gov.au for Exchange rates)
Which kind of makes sense when you think about it. The Australian Dollar/US Dollar exchange rate is usually a reflection of the interest rate, economy and growth of Australia, compared to the US, two things that also factor into valuation of stocks. Also, foreign dollar inflows into the Australian sharemarket will also lift the Exchange rate, and increase the value of the ASX200 due to increased buying activity. The correlation co-efficient is pretty strong (0.69).
So if anything, a reduction in the aussie might indicate a correction about to occur on the ASX. Watch this space!
Which kind of makes sense when you think about it. The Australian Dollar/US Dollar exchange rate is usually a reflection of the interest rate, economy and growth of Australia, compared to the US, two things that also factor into valuation of stocks. Also, foreign dollar inflows into the Australian sharemarket will also lift the Exchange rate, and increase the value of the ASX200 due to increased buying activity. The correlation co-efficient is pretty strong (0.69).
So if anything, a reduction in the aussie might indicate a correction about to occur on the ASX. Watch this space!
Tuesday, May 21, 2013
Oakton Cash Flow - Where did the money come from?
Been running the ruler over Oakon, an IT services company based in Victoria. Share price has been pretty flat over the last two years. Wondering why that is when most other IT Services companies have been going great guns.
Looking over the 2012 Annual report I noticed that the cash balance had improved dramatically over the year, yet profits were down and no new debt/equity had been accessed (in fact there seemed to be capital reduction with debt extinguished and a share buy back implemented) So I did some digging.
It seems the big increase occurred as a result of a massive reduction in Receivables, specifically an entry called "Other debtors and Security Deposits". This entry had $17 million in it in 2011, but in 2012, it went down to $3.7 million, a reduction of $14 million in a year. When this 14 million is likely to have gone straight into cash (and cash balance increased by $8.3 million overall) surely it is a pretty significant disclosure. Yet no mention in the Annual report.
It's also not sustainable as there is only $3.7 million left in this particular kitty. In fact, if you remove this cash injection, Oakton would appear to be losing cash year on year from its operations, investments and financing.
Another red flag for me is the fact that directors long term incentives are based on Absolute Diluted Earnings per share, rather than a relative measure. The conspiracy theorist within would be saying that this is why they are actioning their buyback, rather than the inability to use shareholders funds to add value, especially when the cash position isn't quite as good as it appears to be.
Note: Not a recommendation to invest/not invest in Oakton. Please talk to financial advisor.
Looking over the 2012 Annual report I noticed that the cash balance had improved dramatically over the year, yet profits were down and no new debt/equity had been accessed (in fact there seemed to be capital reduction with debt extinguished and a share buy back implemented) So I did some digging.
It seems the big increase occurred as a result of a massive reduction in Receivables, specifically an entry called "Other debtors and Security Deposits". This entry had $17 million in it in 2011, but in 2012, it went down to $3.7 million, a reduction of $14 million in a year. When this 14 million is likely to have gone straight into cash (and cash balance increased by $8.3 million overall) surely it is a pretty significant disclosure. Yet no mention in the Annual report.
It's also not sustainable as there is only $3.7 million left in this particular kitty. In fact, if you remove this cash injection, Oakton would appear to be losing cash year on year from its operations, investments and financing.
Another red flag for me is the fact that directors long term incentives are based on Absolute Diluted Earnings per share, rather than a relative measure. The conspiracy theorist within would be saying that this is why they are actioning their buyback, rather than the inability to use shareholders funds to add value, especially when the cash position isn't quite as good as it appears to be.
Note: Not a recommendation to invest/not invest in Oakton. Please talk to financial advisor.
Monday, May 20, 2013
Yahoo does it again...overpays for "Cool"
It seems that Marissa Mayer has again decided to waste investors funds
1.1 billion for Tumblr??? To pay that amount of money for a company that earned a grand total of $13 million in REVENUE last year (That's not EBITDA, but REVENUE) is a bit much.
Lets look at the figures. Based on that revenue figure, and assuming a EBITDA ratio the same as LinkedIN of 14% (a generous assumption to say the least) that would be EDITDA of $1.8 million
So a valuation of 1.1 Billion would be an EBITDA multiple of 604! Consider LinkedIN again, which is trading at EDITBA multiple of 140 of current EBITDA (which a lot of people also say is overvalued)
If we use that muliple and add a 50% growth premium on the EBITDA multiple for a new company (another generous assumption), lets see what Tumblr should be valued at if the multiple was 210. Based on that, the valuation of Tumblr should be $382 million...a more reasonable figure for a growth company.
But maybe I'm wrong. Maybe Marissa sees something that alludes me. But I can't see Yahoo getting a lot of return on this investment.
Note: Not a recommendation to invest/not invest with Yahoo. See Financial advisor etc.
1.1 billion for Tumblr??? To pay that amount of money for a company that earned a grand total of $13 million in REVENUE last year (That's not EBITDA, but REVENUE) is a bit much.
Lets look at the figures. Based on that revenue figure, and assuming a EBITDA ratio the same as LinkedIN of 14% (a generous assumption to say the least) that would be EDITDA of $1.8 million
So a valuation of 1.1 Billion would be an EBITDA multiple of 604! Consider LinkedIN again, which is trading at EDITBA multiple of 140 of current EBITDA (which a lot of people also say is overvalued)
If we use that muliple and add a 50% growth premium on the EBITDA multiple for a new company (another generous assumption), lets see what Tumblr should be valued at if the multiple was 210. Based on that, the valuation of Tumblr should be $382 million...a more reasonable figure for a growth company.
But maybe I'm wrong. Maybe Marissa sees something that alludes me. But I can't see Yahoo getting a lot of return on this investment.
Note: Not a recommendation to invest/not invest with Yahoo. See Financial advisor etc.
Thursday, May 2, 2013
Blowing Bubbles - The big 4 Australian Banks
Lots of talk about banking bubbles at the moment. So I figured I would check out the normalised RSI of the banks vs the ASX200. Other than CBA (outperforming the ASX200 by almost 50%) I don't think so. Poor old NAB is still bringing up the rear (underperfoming by almost 40%). But ANZ (only 4% outperforming) and WBC (20% over) still look fair value to me.
Usual disclaimer of not advice to invest/not invest. See Financial Advisor etc.
Tuesday, April 30, 2013
Billabonged Part 2 - TPG offer in early 2012 seemed right on the money!
Been continuing my series on Billabong in conjunction with my CFA Level 2 Equity revision.
The next part of Equity valuation is all about Free Cash Flow to the Firm (FCFF) and Free Cash Flow to Equity (FCFE). These values refer to the amount of cash available to all capital holders (FCFF) or just to equity holders (FCFE...with Debt Repayments and increases removed)
The formulas are as follows
FCFF = Cash flow from operations + (Interest expense*(1- Effective tax rate)) - Cash Flow from Investments
FCFE = FCFF + Debt increases - Debt repayments
Once you have FCFE, you can then use a DCF model to find the intrinsic value of equity and then divide by the number of shares on issue to get a value per share.
the DCF model used : Price = FCFE*(1*SustainableGrowthRatio)/(Rate of return - SustainableGrowthRatio)
Sustainable growth ration = ROE*(1- DividendPayoutratio)
So using all these formula's brings us to the following FCFE over the years for Billabong
2012 2011 2010 2009 2008 2007
85 million 64 million 13 million 32 million 197 million 196 million
Again 2009 was the year when people should have got out. A really massive drop in FCFE
Looking at the SustainableGrowthRatios is also reflective
2012 2011 2010 2009 2008 2007
-26% 3.74% 4.53% 4.55% 7.95% 8.36%
Rate of returns (Using CAPM, equity risk premium calculated August 2012 earlier on Blog, 1 year average of monthly 10 year Commbonds yields for riskfree rate and Beta calculated using moving monthly returns over 5 years, and then adjusted)
2012 2011 2010 2009 2008 2007
15% 12.65% 10.75% 13.06% 13.7% 14%
All up leads to the following intrinsic share prices
2012 2011 2010 2009 2008 2009
$0.49 $2.99 $0.86 $1.79 $17.97 $18.25
All these are based on the beginning of the next financial year...i.e in July 2012, the intrinsic price based on the FCFE was $0.49. The TPG offer was made in Feb 2012, when the intrinsic value was still at $3. They offered $3.30 which was a nice 10% premium. A lot of investors, I'm sure would have been hoping for that offer to be accepted, especially now as the share price is at 0.477. Actually might be worth a buy now as it is trading at a 2.7% discount :-)
Proves a couple of things
1. Private Equity are using FCFE for valuation
2. Good idea to watch these values over the years.
Note: Not a recommendation to invest/not invest in Billabong. Please see your financial advisor etc.
The next part of Equity valuation is all about Free Cash Flow to the Firm (FCFF) and Free Cash Flow to Equity (FCFE). These values refer to the amount of cash available to all capital holders (FCFF) or just to equity holders (FCFE...with Debt Repayments and increases removed)
The formulas are as follows
FCFF = Cash flow from operations + (Interest expense*(1- Effective tax rate)) - Cash Flow from Investments
FCFE = FCFF + Debt increases - Debt repayments
Once you have FCFE, you can then use a DCF model to find the intrinsic value of equity and then divide by the number of shares on issue to get a value per share.
the DCF model used : Price = FCFE*(1*SustainableGrowthRatio)/(Rate of return - SustainableGrowthRatio)
Sustainable growth ration = ROE*(1- DividendPayoutratio)
So using all these formula's brings us to the following FCFE over the years for Billabong
2012 2011 2010 2009 2008 2007
85 million 64 million 13 million 32 million 197 million 196 million
Again 2009 was the year when people should have got out. A really massive drop in FCFE
Looking at the SustainableGrowthRatios is also reflective
2012 2011 2010 2009 2008 2007
-26% 3.74% 4.53% 4.55% 7.95% 8.36%
Rate of returns (Using CAPM, equity risk premium calculated August 2012 earlier on Blog, 1 year average of monthly 10 year Commbonds yields for riskfree rate and Beta calculated using moving monthly returns over 5 years, and then adjusted)
2012 2011 2010 2009 2008 2007
15% 12.65% 10.75% 13.06% 13.7% 14%
All up leads to the following intrinsic share prices
2012 2011 2010 2009 2008 2009
$0.49 $2.99 $0.86 $1.79 $17.97 $18.25
All these are based on the beginning of the next financial year...i.e in July 2012, the intrinsic price based on the FCFE was $0.49. The TPG offer was made in Feb 2012, when the intrinsic value was still at $3. They offered $3.30 which was a nice 10% premium. A lot of investors, I'm sure would have been hoping for that offer to be accepted, especially now as the share price is at 0.477. Actually might be worth a buy now as it is trading at a 2.7% discount :-)
Proves a couple of things
1. Private Equity are using FCFE for valuation
2. Good idea to watch these values over the years.
Note: Not a recommendation to invest/not invest in Billabong. Please see your financial advisor etc.
Monday, April 29, 2013
Market Risk Premium of ASX in April 2013 : 3.72%
Time for another update on the Market Risk Premium for the ASX.
Using my customary 2.5 years of individual returns for the ASX200, we have a market return (Capital Gain) of 3.27% p.a. Adding the average dividend yield over this time of 4.6%, means we have a market return of 7.87% (down from August 2012 by around 2%). Risk free rate (10 year Commonwealth Bond) average of 4.15% means our market risk premium = 7.87%-4.15% =3.72% (down from 5.13% in August).
Which makes sense I guess as interest rates have fallen, you would expect the cost of capital of equity to go down a little as well.
Using my customary 2.5 years of individual returns for the ASX200, we have a market return (Capital Gain) of 3.27% p.a. Adding the average dividend yield over this time of 4.6%, means we have a market return of 7.87% (down from August 2012 by around 2%). Risk free rate (10 year Commonwealth Bond) average of 4.15% means our market risk premium = 7.87%-4.15% =3.72% (down from 5.13% in August).
Which makes sense I guess as interest rates have fallen, you would expect the cost of capital of equity to go down a little as well.
Friday, April 26, 2013
Valuing the ASX200 using the Gordon Growth Model - Seems undervalued
Still studying for my CFA Level 2 Exam (rapidly approaching in June) and came across that old friend, The Gordon Growth Model formula. What was new however, is using it to value indexes. So I decided to apply it to the ASX200.
As most of you know, the GGM formula is (Price today) = (Dividend Next Year)/((Rate of Return)-(Growth))
Using RBA figures, we have the average dividend yield over the last 2.5 years as being 4.6%. Applying that to the 1 April value of the ASX200 = 4931 we have a dividend today of 231.80. Assuming a growth rate of 3.25% (OECD forecast), that means next years dividend = 239.33.
Now to our rate of return. Using ASX200 daily returns since November 2010 (the usual 2.5 years), we have an average daily return of 0.0128%. Multiplied by the 256 trading days, we have an yearly return of 3.26%. Add on that dividend yield and we get 7.86% being our total market return.
10 year bond rate average over that same 2.5 yearly period gives us a risk free rate of 4.15%
Using CAPM (with the ASX200 Beta =1) we have a rate of return being 4.15+1* (7.86-4.15) =7.86%
Using g = 0.0325, therefore the ASX value should be 239.33/(7.86-0.0325) = 5183.
Therefore, with April's value of ASX200 being 4931, it appears by this definition that the index is undervalued by around 5%. Could also explain why the index has grown to 5100 today as people start to see the value.
As most of you know, the GGM formula is (Price today) = (Dividend Next Year)/((Rate of Return)-(Growth))
Using RBA figures, we have the average dividend yield over the last 2.5 years as being 4.6%. Applying that to the 1 April value of the ASX200 = 4931 we have a dividend today of 231.80. Assuming a growth rate of 3.25% (OECD forecast), that means next years dividend = 239.33.
Now to our rate of return. Using ASX200 daily returns since November 2010 (the usual 2.5 years), we have an average daily return of 0.0128%. Multiplied by the 256 trading days, we have an yearly return of 3.26%. Add on that dividend yield and we get 7.86% being our total market return.
10 year bond rate average over that same 2.5 yearly period gives us a risk free rate of 4.15%
Using CAPM (with the ASX200 Beta =1) we have a rate of return being 4.15+1* (7.86-4.15) =7.86%
Using g = 0.0325, therefore the ASX value should be 239.33/(7.86-0.0325) = 5183.
Therefore, with April's value of ASX200 being 4931, it appears by this definition that the index is undervalued by around 5%. Could also explain why the index has grown to 5100 today as people start to see the value.
Monday, April 15, 2013
Higher Learning
I'm amazed by the cutting of the HECS-HELP 10% discount announced by the Gillard Government. Talk about short sighted.
If you take away the discount, which according to the Gratton Institute report on Higher Education is only worth $40 million a year, you take away any incentive for people to pay university fees upfront. That means people will take on HELP debt and so add to the rapidly increasing stock pile of outstanding money (currently at $26.3 Billion).
The problem with this is that some of this debt is never re payed (approx $6.2 billion is estimated as doubtful debt) So that is a doubtful debt ratio of 23.6%.
Let's do a little exercise. If we assume $40 million represents the 10% discount, then 100% = $400 million. Thus $360 million would be the amount of money received by the government for upfront payments.
Lets assume that with the reduction of the discount, only 20% of people who currently pay up front, do so now. Therefore the amount that goes onto the Government coffers is $80 million, leaving $320 million going into the HECS debt pile. As only 77.4% of this is recovered, that gives up $224.48 million eventually going into the coffers, a loss of $75 million. And that doesn't even count the time value of money (the fact that $1 today is worth more than a dollar tomorrow).
Even if you use 17% as the doubtful debt ratio (Government's own figures), you end up with a loss of $54 million, still greater than the $40 million discount.
Only this government can claim this is a saving!
If you take away the discount, which according to the Gratton Institute report on Higher Education is only worth $40 million a year, you take away any incentive for people to pay university fees upfront. That means people will take on HELP debt and so add to the rapidly increasing stock pile of outstanding money (currently at $26.3 Billion).
The problem with this is that some of this debt is never re payed (approx $6.2 billion is estimated as doubtful debt) So that is a doubtful debt ratio of 23.6%.
Let's do a little exercise. If we assume $40 million represents the 10% discount, then 100% = $400 million. Thus $360 million would be the amount of money received by the government for upfront payments.
Lets assume that with the reduction of the discount, only 20% of people who currently pay up front, do so now. Therefore the amount that goes onto the Government coffers is $80 million, leaving $320 million going into the HECS debt pile. As only 77.4% of this is recovered, that gives up $224.48 million eventually going into the coffers, a loss of $75 million. And that doesn't even count the time value of money (the fact that $1 today is worth more than a dollar tomorrow).
Even if you use 17% as the doubtful debt ratio (Government's own figures), you end up with a loss of $54 million, still greater than the $40 million discount.
Only this government can claim this is a saving!
Billabonged....A story of declining Asset Quality, Earnings Queries and Off Balance Sheet Debt
Been running the ruler over the sad story of Billabong. What a disaster. A share price that tanked from the highs of 2007 ($16 odd) to it's current price of $0.53. When you look at the chart, there is an awful lot of value destruction.
So I decided to have a look at the fundamentals to see if there were any red flags a long the way.
And as far as I can see, there were four areas that would concern me.
1. Net Margin Decline
NPAT/Revenue went from 13.7% in 2007, to 13% (2008), to 9.13% (2009), to 9.75% (2010), to 6.9% (2011). Besides the brief uptick in 2010, it's been all downhill
2. Quality of Earnings
Accruals ratio went from 12.58% in 2008 to 19.78% in 2009. It then decreased to 2.78% in 2010, but jumped again in 2011 to 15% Clearly some inconsistancies in relation to cash management.
3. Asset Quality
Using my favourite ratio of ROA, we have it at 12% in 2007, but then a steady degredation to 11% (2008), 7% in 2009, 6.5% in 2010 to a miniscule 4.9% in 2011. Lots of money going into asset purchase, but no luck squeezing profit out of them.
4. Off Balance Sheet debt. When you include the non-cancelable operating leases to reported debt, you end up with a debt/equity ratio that is trending up from 0.66 (2007) to 0.87 (2008) to 0.73 (2009) to 0.59 (2010) and getting to 0.89 (2011)
So it definitely started to go pear shaped around 2009. The big red flag in my opinion was the increase in Accruals ratio in 2009 combined with the ROA reduction..Probably would have tried to get out then in my opinion.
Still, it's all in hindsight now isn't it.
So I decided to have a look at the fundamentals to see if there were any red flags a long the way.
And as far as I can see, there were four areas that would concern me.
1. Net Margin Decline
NPAT/Revenue went from 13.7% in 2007, to 13% (2008), to 9.13% (2009), to 9.75% (2010), to 6.9% (2011). Besides the brief uptick in 2010, it's been all downhill
2. Quality of Earnings
Accruals ratio went from 12.58% in 2008 to 19.78% in 2009. It then decreased to 2.78% in 2010, but jumped again in 2011 to 15% Clearly some inconsistancies in relation to cash management.
3. Asset Quality
Using my favourite ratio of ROA, we have it at 12% in 2007, but then a steady degredation to 11% (2008), 7% in 2009, 6.5% in 2010 to a miniscule 4.9% in 2011. Lots of money going into asset purchase, but no luck squeezing profit out of them.
4. Off Balance Sheet debt. When you include the non-cancelable operating leases to reported debt, you end up with a debt/equity ratio that is trending up from 0.66 (2007) to 0.87 (2008) to 0.73 (2009) to 0.59 (2010) and getting to 0.89 (2011)
So it definitely started to go pear shaped around 2009. The big red flag in my opinion was the increase in Accruals ratio in 2009 combined with the ROA reduction..Probably would have tried to get out then in my opinion.
Still, it's all in hindsight now isn't it.
Tuesday, April 9, 2013
Cock-a-hoop about Cochlear
Been running the ruler over Cochlear as it appears to have been shunned by investors. Not exactly sure why. But the share price has fallen though the floor in recent times.
Sure there have been some downside surprises on the earnings front, but a lot of the negativity comes from the product recall which is now in the rear view mirror!
Due to my CFA Exam 2 studies, I have been focusing on quality of earnings, specifically the Balance Sheet Accruals ratio. This gives you some insight into how much of the earnings are cash vs how much is accruals. Cash earnings are a lot more robust and sustainable than Accruals.
It involves calculating the change in the Net Operating assets over the years (also known as Aggregate Accruals) and then dividing that number by the Average Net operating assets over the years.
Using the annual reports, I have the following figures for Cochlear
2009-2010 - BS Accruals ratio = 15.5%
2010 - 2011 - BS Accruals ratio = 15%
2011 - 2012 - BS Accruals ratio = -22%!!!
Now a negative Accruals ratio is a good thing. It means that the Financial reporting is extremely conservative in regards to accruals (focusing more on cash earnings)
So there was an element of "taking out the trash" in the latest financial report. That is why I believe that earnings next year for Cochlear will probably surprise on the upside as the accruals ratio becomes positive.
Note: This is not financial advise or a recommendation to invest, not invest in Cochlear. Please consult a financial advisor for all investment decisions.
Due to my CFA Exam 2 studies, I have been focusing on quality of earnings, specifically the Balance Sheet Accruals ratio. This gives you some insight into how much of the earnings are cash vs how much is accruals. Cash earnings are a lot more robust and sustainable than Accruals.
It involves calculating the change in the Net Operating assets over the years (also known as Aggregate Accruals) and then dividing that number by the Average Net operating assets over the years.
Using the annual reports, I have the following figures for Cochlear
2009-2010 - BS Accruals ratio = 15.5%
2010 - 2011 - BS Accruals ratio = 15%
2011 - 2012 - BS Accruals ratio = -22%!!!
Now a negative Accruals ratio is a good thing. It means that the Financial reporting is extremely conservative in regards to accruals (focusing more on cash earnings)
So there was an element of "taking out the trash" in the latest financial report. That is why I believe that earnings next year for Cochlear will probably surprise on the upside as the accruals ratio becomes positive.
Note: This is not financial advise or a recommendation to invest, not invest in Cochlear. Please consult a financial advisor for all investment decisions.
Tuesday, April 2, 2013
Prediction for Reserve Bank - Hold rates at 3%
Once again, I think the Reserve will propose a "Wait and See" approach to the Australian Economy, especially with the whole Cyprus situation. This means the Australian Dollar will probably stay high for the foreseeable future.
Monday, March 11, 2013
Growth in the USA - Need to grow the hours
Continuing my study of growth factors in various countries around the world, we come to the USA.
Between the years of 2000 - 2011 we have potential growth at an average of 1.46% a year. Not a great result, but the interesting thing is that they have done it with absolutely no growth in Labour hours. The growth has come from capital (1% a year) and Total Factor Productivity (around 0.46% a year). Annual hours worked has stayed exactly the same as 2000 levels.
So the next step in the US journey of growth has to be hours worked. They need to get the punters working. If they can boost that, and maintain their capital investment and TFP (always a strength in the US), they can get back on top.
Between the years of 2000 - 2011 we have potential growth at an average of 1.46% a year. Not a great result, but the interesting thing is that they have done it with absolutely no growth in Labour hours. The growth has come from capital (1% a year) and Total Factor Productivity (around 0.46% a year). Annual hours worked has stayed exactly the same as 2000 levels.
So the next step in the US journey of growth has to be hours worked. They need to get the punters working. If they can boost that, and maintain their capital investment and TFP (always a strength in the US), they can get back on top.
Friday, February 22, 2013
Lost in Translation - The Japanese Growth Story
After calculating the sources of economic growth for Australia, I turned my attention to Japan. Looks a lot less promising.
Using the same methodology as the previous post I calculated that growth of potential GDP was a minuscule 0.02% a year...not great at all. And it's pretty easy to see why. Apart from TFP (which at an annual rate of 0.55% is saving the day) it looks pretty ordinary on the Labour and Capital Fronts.
The reduction in capital hurts a bit, but it's the labour hours that is the real story (which in 2012 are at 1963 levels!) Even with all the bluster about reducing their currency and chasing an inflation target of 2%, at the end of the day, I can't see the Japanese story improving until their Labour Force gets sorted out.
Using the same methodology as the previous post I calculated that growth of potential GDP was a minuscule 0.02% a year...not great at all. And it's pretty easy to see why. Apart from TFP (which at an annual rate of 0.55% is saving the day) it looks pretty ordinary on the Labour and Capital Fronts.
Wednesday, February 20, 2013
Where Australia's Growth is coming from - Net Fixed Capital Investment
As part of the CFA Level 2 Syllabus, we look at Economic Growth and try to separate it into it's relevant factors.
As an exercise, I tried to see where Australia's growth of potential GDP came from between 2000 and 2012. The neoclassical theory of Capital Growth claims that there are three areas that provide most of this growth :-
1. Labour (Growth in hours worked specifically)
2. Capital (Growth in Capital Stock less Depreciation (or consumption of capital)
3. Total Factor Productivity (also used as a proxy for technology)
Using a variety of sources (ABS, OECD, The Conference Board), I have calculated the average potential growth rate to be 2.31% a year over this period. The break down of the growth is as follows :-
Labor - providing 0.97%
Capital - providing 1.92%
TFP - providing (0.58%) *Not great as this is usually the source of long term growth in a developed economy.
So it's Capital Deepening rather than anything else providing the growth (over 80% of it). Bit of a worry as when the capital spend dries up, so will the long term growth.
And is our capital spend drying up. Well while the trend is still up, we can see a little levelling off occurring in the Fixed Capital Spend over the last few years. Let's hope it doesn't go down too quickly.
As an exercise, I tried to see where Australia's growth of potential GDP came from between 2000 and 2012. The neoclassical theory of Capital Growth claims that there are three areas that provide most of this growth :-
1. Labour (Growth in hours worked specifically)
2. Capital (Growth in Capital Stock less Depreciation (or consumption of capital)
3. Total Factor Productivity (also used as a proxy for technology)
Using a variety of sources (ABS, OECD, The Conference Board), I have calculated the average potential growth rate to be 2.31% a year over this period. The break down of the growth is as follows :-
Labor - providing 0.97%
Capital - providing 1.92%
TFP - providing (0.58%) *Not great as this is usually the source of long term growth in a developed economy.
So it's Capital Deepening rather than anything else providing the growth (over 80% of it). Bit of a worry as when the capital spend dries up, so will the long term growth.
And is our capital spend drying up. Well while the trend is still up, we can see a little levelling off occurring in the Fixed Capital Spend over the last few years. Let's hope it doesn't go down too quickly.
Wednesday, January 23, 2013
CFA Level 1 Exam Result.......PASSED!!!!!!!
Congrats to the 37% of applicants who passed. Commiserations to those that didn't.
(Don't lose too much hope, I didn't pass the first time either)
Onto Level 2........
(Don't lose too much hope, I didn't pass the first time either)
Onto Level 2........
Friday, January 18, 2013
How much is the MRRT earning - Around $414 million a quarter
Lots of controversy in the press regarding the Mineral Resource Rent Tax and how the Tax department can't give out any information to the Treasurer as it would violate Privacy. Pleasseeeeeee.
How a Government Department (even the Taxation department) that isn't indepentent by any means (unlike the Reserve Bank) can deny information from it's head is rubbish in my opinion. So why the secrecy.
Here at Goat central, we like to get to the bottom of things. So I have created an extremely simplistic econometric model to see if I can separate the wheat from the chaff so to speak. The model is as follows
Quarterly Resource Rent tax earnings for the present quarter = constant + A*(Quarterly Resource Rent Earnings for previous quarter) + B*(Dummy Variable of MRRT applied) + C*(CPI for the quarter)+Error
As mentioned, very simplistic, but the Co-efficient of the Dummy Variable should give us a rough estimate of how much the MRRT earns in a quarter. (though as we have figures for only 1 quarter of the MRRT, it is an extremely rough estimate). Be better once we have the next couple of quarters.
I optained the monthly data of earnings from the total RRT (which includes both PRRT and MRRT) from the monthly and annual statements on www.finance.gov.au (to gain quarterly, I added up the earnings from the previous 3 months). CPI data I located from www.abs.gov.au (which is the annual change in the prices from same quarter of previous year). I then loaded it all into excel and performed an OLS regression. Results are
Quarterly Resource Rent Tax earnings = 60.2+0.295*(Quarterly Resource Rent Earnings for previous quarter)+414.63*(Dummy Variable of MRRT applied)+6678.94*(CPI for quarter)
(all co-efficient figures in millions)
Adjusted R2 = 0.21
Error = 158.76
So based on this, the MRRT is earning roughly $414.63 million in it's first quarter. It is statistically significantly different from zero at the 95% confidence interval (this confidence interval is $765 million (max) to $56 million (min)) So even at it's most optimistic, the MRRT is likely to earn only $3 billion a year, and with the PRRT only likely to hit $1.5 billion (5 year average), it's a far cry from the $7.5 billion budgeted by Treasury. It's a $3 billion black hole.
No wonder the Government want to hide the figures.
How a Government Department (even the Taxation department) that isn't indepentent by any means (unlike the Reserve Bank) can deny information from it's head is rubbish in my opinion. So why the secrecy.
Here at Goat central, we like to get to the bottom of things. So I have created an extremely simplistic econometric model to see if I can separate the wheat from the chaff so to speak. The model is as follows
Quarterly Resource Rent tax earnings for the present quarter = constant + A*(Quarterly Resource Rent Earnings for previous quarter) + B*(Dummy Variable of MRRT applied) + C*(CPI for the quarter)+Error
As mentioned, very simplistic, but the Co-efficient of the Dummy Variable should give us a rough estimate of how much the MRRT earns in a quarter. (though as we have figures for only 1 quarter of the MRRT, it is an extremely rough estimate). Be better once we have the next couple of quarters.
I optained the monthly data of earnings from the total RRT (which includes both PRRT and MRRT) from the monthly and annual statements on www.finance.gov.au (to gain quarterly, I added up the earnings from the previous 3 months). CPI data I located from www.abs.gov.au (which is the annual change in the prices from same quarter of previous year). I then loaded it all into excel and performed an OLS regression. Results are
Quarterly Resource Rent Tax earnings = 60.2+0.295*(Quarterly Resource Rent Earnings for previous quarter)+414.63*(Dummy Variable of MRRT applied)+6678.94*(CPI for quarter)
(all co-efficient figures in millions)
Adjusted R2 = 0.21
Error = 158.76
So based on this, the MRRT is earning roughly $414.63 million in it's first quarter. It is statistically significantly different from zero at the 95% confidence interval (this confidence interval is $765 million (max) to $56 million (min)) So even at it's most optimistic, the MRRT is likely to earn only $3 billion a year, and with the PRRT only likely to hit $1.5 billion (5 year average), it's a far cry from the $7.5 billion budgeted by Treasury. It's a $3 billion black hole.
No wonder the Government want to hide the figures.
Gillard GoatMeter - 52.5/47.5 to the Libs
Time for the first update in the new Year. After the last two new polls from Essential and NewsPoll we have the Coalition extending their lead over Labor. And it's an election year. Doesn't look good for Gillard.
Thursday, January 10, 2013
ARM'ing the ASX
As a night time side project from my day job, I have been busy honing my Java skills, creating a program that downloads price information for the entire ASX from Yahoo Finance and then calculates the ARMS index (or TRIN).
The TRIN is a useful little technical tool and can give you insight into general market sentiment. To calculate, use the following formula :-
(Number of stocks increasing/Number of stocks decreasing)/(Volume of stocks increasing/Volume of stocks decreasing)
Over last two days, the TRIN has gone from 0.88 to 0.89, indicating that buyers are in the asendency at the moment (anything under 1 means people are buying, over 1, people are selling)
A figure at around 0.9 is always a good sign for the bulls and a great indicator that the All Ordinaries will continue to increase at least in the short term
However the fact that it is going up slightly indicates that maybe the rally is starting to stall. Once it cuts over 1, I think it would indicate that maybe the selloff has begun.
But this is all academic until the fundies get back in the game (I think most of are still out sking in Aspen). Hard to tell anything with the low volumes being bought and sold at the moment, so don't hold me to account just yet. Still, I can at least say my Java skills are coming along :-)
Will keep you posted if there are any changes.
The TRIN is a useful little technical tool and can give you insight into general market sentiment. To calculate, use the following formula :-
(Number of stocks increasing/Number of stocks decreasing)/(Volume of stocks increasing/Volume of stocks decreasing)
Over last two days, the TRIN has gone from 0.88 to 0.89, indicating that buyers are in the asendency at the moment (anything under 1 means people are buying, over 1, people are selling)
A figure at around 0.9 is always a good sign for the bulls and a great indicator that the All Ordinaries will continue to increase at least in the short term
However the fact that it is going up slightly indicates that maybe the rally is starting to stall. Once it cuts over 1, I think it would indicate that maybe the selloff has begun.
But this is all academic until the fundies get back in the game (I think most of are still out sking in Aspen). Hard to tell anything with the low volumes being bought and sold at the moment, so don't hold me to account just yet. Still, I can at least say my Java skills are coming along :-)
Will keep you posted if there are any changes.
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